# Option Charter

Carrying on from the JavaScript Option Price Calculator, this Java applet implements the same functionality, but also draws a chart showing the range of prices the option can take when one variable is changed, and the others remain constant.

The **Option Charter** applet works in conjunction with a JavaScripted HTML form
to set its parameters. Some background information for interested users,
and instructions for using the applet are given at the bottom of the page.

## Background & Instructions

(**Note:** to demonstrate the functionality and applications
of such a facility, the user interface has deliberately been made
fairly complex. In a real situation, it may be the case that a simpler,
more intuitive interface would be more appropriate for users. That is
a decision which must be made on a case-by-case basis, depending both
on the purpose and intended audience of the application.)

Click here to view or download the Java source code for this applet.

## Background

**Options** are a type of derivative financial instrument,
which means they have no intrinsic value in themselves (unlike
a unit of company stock, which gives a right to a future stream of
dividends), but rather *derive* their value from some underlying
asset. A **call option** gives the holder the right to buy, at
some specified time in the future, at some specified price, an
asset (in this case, a unit of stock). Correspondingly, a **put
option** gives the holder the right to sell such an asset at a
given date in the future.

The price of an option can be estimated using the famous **Black-Scholes**
model, which this applet uses. In that model, the price of the option
depends on five factors, or variables:

- The price of the underlying asset
- The price at which the option holder has the right to buy or
sell the underlying asset for (called the
*strike price*) - The standard deviation of the underlying asset price (in other words, how variable the underlying stock price is)
- The interest rate on risk-free loans
- The amount of time between now, and the
*exercise date*specified by the option (the*time to expiration*)

The holder of an **American option** has the right to buy or sell
the underlying asset at any time he/she chooses between now and the
exercise date; the holder of a **European option** can only exercise
the option on the exercise date itself.

In practice, the Black-Scholes model is a horrendous-looking equation,
and calculating the price of an option can be a real pain, which is why
a price calculator like this can be very useful. In addition, being
able to specify which of the five variables goes on the X-axis of the chart
means the option trader can see clearly and immediately just how sensitive
the price of an option is to changes in those variables, making **Option
Charter** a useful tool.

## Instructions

To calculate the price of an option, simply enter the values for the five
variables into the input fields in **Option Charter**, specify whether
the option is a European call or a European put, and hit the
Update Chart button. The price will appear
just below the chart itself.

To use the chart itself, use the drop down menu to specify which of the five variables is to be the independent one (i.e. goes along the X-axis). For instance, to see how sensitive your option price would be to changes in the volatility of the underlying stock price, select "Standard deviation" as the independent variable, and hit the Update Chart button.

**Option Charter** will make an intelligent guess as to the scales you
wish to use on the axis. However, if you would like to specify your own
scales (e.g. to more clearly see how the relationship between option price
and stock price is affected by changes in the risk-free interest rate), simply
click your mouse cursor anywhere on the chart, and enter the ranges for the
axes that you desire in the dialog box that appears. To revert to automatic
scaling, simply make sure that the "Set scale manually?" checkbox in the
dialog box is unchecked.